Friday, December 28, 2012

Nigeria: Airline Bankruptcies

By Capt. Daniel Omale, 28 December 2012

The airline industry is one of the toughest in which to do business anywhere in the world. Anyone who doubts this statement should ask the owners of Arik Air, Aero Contractors, Air Nigeria, DANA air, and First Nation Airlines. The crises associated with airline business are rooted in cost of funds, fixed and variable operational expenses. In addition to these costs are harsh government policies in the operating environment.

Even in the most aviation- friendly nations where governments support the creation of jobs through airline operations to stimulate the economy, costs of keeping aircraft flying, most times, create unbearable burden to airlines' long- term existence.

Fiercely protective regulations designed to shelter national carriers from competition make the market one that is far from free and open. The distortions created by this situation create over-capacity that is exploited unfairly, wherever some limited degree of openness allows it.

Trying to survive in such an environment is perilous at the best of times. Every year, several of the world's top 200 airlines prove inadequate to the task and go bankrupt. In the last couple of years, previously well-regarded carriers in the United States, Switzerland and Belgium have been among those to have to call in the receivers.

To add to the difficulties of what amounts to a Darwinian struggle to stay aloft even in normal times, airlines, like everyone else whose business involves transport, have lately faced punishing increases in the price of fuel. Plans and budgets drawn up when the price of oil was $30 to $40 a barrel begin to look sick when the market drives it up to $80 and more.

Airlines in the United States may defy the law of gravity, but they can't ignore math. Since the U.S. government deregulated the industry in 1978, a seemingly endless list of airlines has gone bankrupt - the latest is American Airlines - brought down by high fixed costs and relentless competition. Since airline deregulation in 1978, 189 U.S. airlines have gone bankrupted with nearly $55 billion gone down the drain.

So, what makes anyone go into the business? To me, the answer is purely misconception or ignorance. I don't think that the airline necessarily attracts the best and brightest, which probably go to Silicon Valley - universities and medicine; that's probably part of why the industry has problems. For instance, in Nigeria, once an investor buys an aircraft, he becomes a professor of airline business, defying the basic management and technical rules of the industry. Airline owners often dictate to pilots and engineers when and how the aircraft should be operated.

In the past several decades, airlines disrupted by deregulation, low yields, excess capacity and soaring fuel prices have, from time to time, filed for protection from their creditors, thanks to the celebrated U.S. Chapter 11 bankruptcy protection or similar provision in other countries. Then, usually, they implemented a cost-savings plan, reinforced by job cuts and elimination of unprofitable routes, in preparation for a new start. This was the airline industry's routine, in a slowly evolving context.

On the sixth anniversary of Arik Air a few weeks ago, its chairman, Chief Ararumi Johnson, announced that the accrued interest on loans obtained by the airline stood, then, at N28 billion. This colossal figure is a far cry from the envisaged profit of the airline over the same period in the initial feasibility study. Today, Arik Air is in debt of over N80 billion (from CBN publication a few months ago).

IRS airlines and Aero are equally saddled with debts, although the bailout package by Asset Management Corporation of Nigeria AMCON) has rendered temporary relief, bankruptcy still stands firmly at their doors.

Kingfisher Airlines was established in 2003 in India. It is owned by the Bengaluru-based United Breweries Group. The airline started commercial operations on May 9, 2005 with a fleet of four new Airbus A320-200s operating a flight from Mumbai to Delhi. It started its international operations on September 3, 2008 by connecting Bengaluru with London.

The airline has never made money. Ever since it commenced operations in 2005, it has been reporting losses. After acquiring Air Deccan, Kingfisher suffered a loss of over $182 million for three consecutive years. By early 2012, the airline accumulated losses of over $1.27 billion with half of its fleet grounded and several members of its staff going on strike.

Kingfisher's position in top Indian airlines on the basis of market share had slipped to five from two because of the airline's chronic inability to make a profit. As response, Dr. Vijay Mallya called on the Chairman of Central Board of Direct Taxes and offered to pay up the dues by December 13, 2011, as the Income Tax Department had frozen all its bank accounts.[10] The Kingfisher bank accounts were unfrozen on December 14, 2011.[11] Due non-payment, several Kingfisher's vendors had filed winding up petition with the High Court. As on November 2011, winding up petition of seven creditors was pending before the Bangalore High Court.[12] In the past Lufthansa Technik & Bharat Petroleum Corporation Limited (BPCL) had also filed winding up petition against Kingfisher Airlines.

Tax authorities in India, in May 2012, froze the company's accounts, due to the deduction of income taxes that deducted the salaries of their employees that were not forwarded to government since March 2009.

Due to the ongoing financial crisis, an Airbus A330-200 aircraft was impounded at London Heathrow Airport in the United Kingdom under Court Orders due to unpaid fees to aircraft leasing companies and RBS.

In June 2012, because cheques issued by Kingfisher had bounced, GVK - India's second-largest airport operator - launched legal proceedings against Kingfisher Airlines.

In the United States, AMR Corporation, the parent company of American airlines, filed for Chapter 11 bankruptcy protection on November 29, 2011.

In July 2012, American announced capacity cuts due to the grounding of several aircraft associated with its bankruptcy and lack of pilots due to retirements. American's regional airline, American Eagle, will retire 35 to 40 regional jets as well as its Saab turboprop fleet.

The foregoing is an example of how well-run airlines end up in bankruptcy. In Nigeria, First Nation Air, Chanchangi, and Air Nigeria are bankrupted. The Central Bank of Nigeria's (CBN) bailout funds did nothing to stop the haemorrhage. While a smart businessman like Jimoh Ibrahim cashed out from the intervention funds, a majority of the operators can't find a way to detach from their perils.

In the end, the inevitable will happen - bankruptcy. For those who wish to enter airline business, at the back of their mind, they must keep the notion that a simple government policy or interest rate in Nigeria can drag the business into a bottomless dungeon.


Source:    http://allafrica.com

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